The Story Behind the Story

By going through documents that American International Group’s insurance subsidiaries had filed with state regulators, I discovered that many of these units had large unrealized losses on subprime bonds they had purchased with cash collateral received through the company’s securities lending program. AIG had never announced or publicly discussed these losses. I then spoke with state insurance regulators who told me that they had not been aware that AIG was investing cash received through the securities lending program in riskier subprime debt. The problem was that counterparties were asking for their cash back, which meant that AIG insurers would have to sell the bonds and realize the paper losses in order to return the cash collateral.

I then got an interview with a top finance official at AIG who told me that the parent company planned to inject some $5 billion of capital into the insurance units in order to offset their losses on the subprime debt. I was the first person to report the losses and the cash infusion from the parent company. The cash infusion ultimately proved insufficient and the losses from the securities lending program became the primary reason that AIG failed and required a government bailout. AIG was one of the largest casualties of the subprime real estate crisis.